GDP measures both the economy’s total income and the economy’s total expenditure on goods and services. Thus, GDP per person tells us the income and expenditure of the average person in the economy. Because most people would prefer to receive higher income and enjoy higher expenditure, GDP per person seems a natural measure of the economic well-being of the average individual. Yet some people dispute the validity of GDP as a measure of well-being. When Senator Robert Kennedy was running for president in 1968, he gave a moving critique of such economic measures: [Gross domestic product] does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our courage, nor our wisdom, nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile, and it can tell us everything about America except why we are proud that we are Americans. Much of what Robert Kennedy said is correct. Why, then, do we care about GDP? The answer is that a large GDP does in fact help us to lead good lives. GDP does not measure the health of our children, but nations with larger GDP can afford better healthcare for their children. GDP does not measure the quality of their education, but nations with larger GDP can afford better educational systems. GDP does not measure the beauty of our poetry, but nations with larger GDP can afford to teach more of their citizens to read and enjoy poetry. GDP does not take account of our intelligence, integrity, courage, wisdom, or devotion to country, but all of these laudable attributes are easier to foster when people are less concerned about being able to afford the material necessities of life. In short, GDP does not directly measure those things that make life worthwhile, but it does measure our ability to obtain many of the inputs into a worthwhile life. GDP is not, however, a perfect measure of well-being. Some things that contribute to a good life are left out of GDP. One is leisure. Suppose, for instance, that everyone in the economy suddenly started working every day of the week, rather than enjoying leisure on weekends. More goods and services would be produced, and GDP would rise. Yet despite the increase in GDP, we should not conclude that everyone would be better off. The loss from reduced leisure would offset the gain from producing and consuming a greater quantity of goods and services. Because GDP uses market prices to value goods and services, it excludes the value of almost all activity that takes place outside markets. In particular, GDP omits the value of goods and services produced at home. When a chef prepares a delicious meal and sells it at her restaurant, the value of that meal is part of GDP. But if the chef prepares the same meal for her family, the value she has added to the raw ingredients is left out of GDP. Similarly, child care provided in day-care centers is part of GDP, whereas child care by parents at home is not. Volunteer work also contributes to the well-being of those in society, but GDP does not reflect these contributions. Another thing that GDP excludes is the quality of the environment. Imagine that the government eliminated all environmental regulations. Firms could then produce goods and services without considering the pollution they create, and GDP might rise. Yet well-being would most likely fall. The deterioration in the quality of air and water would more than offset the gains from greater production. GDP also says nothing about the distribution of income. A society in which 100 people have annual incomes of $50,000 has GDP of $5 million and, not surprisingly, GDP per person of $50,000. So does a society in which 10 people earn $500,000 and 90 suffer with nothing at all. Few people would look at those two situations and call them equivalent. GDP per person tells us what happens to the average person, but behind the average lies a large variety of personal experiences. In the end, we can conclude that GDP is a good measure of economic wellbeing for most — but not all — purposes. It is important to keep in mind what GDP includes and what it leaves out. via: N. Gregory Mankiw, Principles of Economics (Sixth Edition)
When comparing economic growth or GDP figures between countries think about:
- What the figure is and how we measure it, e.g. GDP per head per year
- How the GDP is distributed
- The type of economy under consideration, e.g. developed or developing
- The costs of basic commodities in certain economies, e.g. housing in UK against an African country
- How taxes are charged and who actually pays them
- What level of social benefits are paid and to whom
- Life expectancy, protein intake and years in education
- Access to basic amenities, such as clean water
- The proportion of goods and services that are not traded, e.g. home-grown food, bartered services. The presence of these can distort national income figures significantly as they will not appear.
- The problem of comparing national incomes expressed in different currencies and the use of the exchange rate for this purpose.
- The composition of the output, e.g. in terms of armaments and welfare services.
- The extent to which additional output has generated negative externalities which may affect the quality of life.
All of the above will impact on how much of the nation's wealth you have access to and what use it is to you. Factors like these will mean that using just GDP figures as the basis for comparing living standards will be inappropriate and to compare living standards between countries we would also need to look at measures like:
- Access to health care - a good measure of this is doctors or nurses per 1,000 people, though there are others.
- Infant mortality - what proportion of children live beyond their fifth birthday?
- Maternal mortality - how many mothers die in childbirth?
- Life expectancy - how long are people expected to live and are there differences between the genders?
- Access to safe water - is the water safe and how far do people have to travel to get to a safe water supply?
- Agriculture as a percentage of GDP - many developing economies are heavily reliant on their primary sectors.
- Child malnutrition - how much nutrition are children receiving in their diet - difficult to quantify, but a vital indicator of the standard of living.
- Environmental measures - emissions, air quality, pollution indicators, cleanliness of water supply, quality of beaches and so on.
- De-forestation rate - how rapidly is an economy using up its resources?
- Expenditure on social security - social security is a vital safety net for the less well-off, but many developing economies have very poorly developed social security systems, if any.
- Food aid - how much food aid and other overseas aid are they receiving?
- Households with electricity - this is a useful measure of how well developed the infrastructure is.
- Transport infrastructure - ditto.
- Poverty line - how many people are living below the poverty line?
- Access to education - one measure of this is teacher ratios (number of teachers per 1000 etc.), but we could also look at the proportion of the population enrolled at primary, secondary and tertiary levels of education.
- Leisure - access to leisure services, Internet connectivity and so on.
The list above shows the range of other factors that influence one's standard and style of living. Some would add to this political factors such as:
- Open government
- Democracy
- Accountable government
- Civil rights
- Rights of women and minority groups
N.B. We have to be careful not to confuse the cost of living with the standard of living. The cost of living depends on the rate of change of prices and the standard of living will partly depend on the latter in relation to income and also the various factors mentioned above.
As you can see, GDP alone is a fairly inadequate measure of welfare - other factors need to be considered.